Lockheed Martin (NYSE:LMT) has been one of the market’s best large-cap performers in recent days, with investors flocking to the stock following escalating geopolitical tension. Unfortunately, besides the ongoing war happening in Ukraine, there is the potential for a lasting conflict in the Middle East following Hamas’ attack on Israel last weekend. While lasting wars are certainly heartbreaking events, Lockheed Martin is set to benefit from a growing order backlog. In turn, this should sustain its robust revenue and earnings growth, reinforcing a bullish case for its stock.
What Does The Current Geopolitical Landscape Mean for Lockheed Martin?
Lockheed Martin stands as one of the biggest beneficiaries of the ongoing geopolitical turmoil. Wars and conflicts translate to high defense budgets, and given that Lockheed Martin’s aircraft and weapons systems comprise key components of Western nations’ arsenals, the company is set to keep winning highly lucrative contracts.
In fact, NATO allies have already been shipping Lockheed Martin’s Javelin anti-tank missiles and PAC-3 and THAAD interceptor missiles, counter-battery radars, and guided rocket systems, among many other supplies, to Ukraine. Additionally, Israel’s Defense Forces (IDF) have been making heavy use of the company’s aircraft and defense systems since the weekend invasion. Notably, Lockheed Martin has provided the Israel Air Force with fifth-generation fighter jets and its Multiple Launch Rocket System (MLRS), along with various radars, rockets, fire control, and guidance systems.
Clearly, the company benefits from both conflicts right now. Whether it’s Ukraine depleting NATO’s supplies or the IDF utilizing its own systems and ammunition, the end result for Lockheed Martin will be a growing number of future supply orders. Due to the possibility of further geopolitical instability as threats loom on multiple fronts (including a potential conflict between China and Taiwan), you can see why investors’ interest in Lockheed Martin has surged recently.
Strong Backlog To Sustain Elevated Results
As I mentioned, the ongoing escalating conflicts directly translate to a growing order backlog for Lockheed Martin. In turn, this is to sustain elevated results for the company.
For context, Lockheed Martin ended Q2 with a record backlog of $158 billion. This was notably higher than the $150 billion worth of order backlog the company started the year with.
Thus, with this rising backlog and the resulting increase in the number of deliveries, Lockheed Martin posted revenue growth of 8% for the quarter, reaching $16.7 billion. As a result, its earnings also grew, with adjusted EPS rising to $6.73 from $6.32 in the prior year period. This trend should persist as defense budgets remain elevated, given the current geopolitical landscape.
Is Lockheed Martin’s Decelerating Dividend Growth Concerning?
While the ongoing tailwinds Lockheed Martin is enjoying may sound optimistic for its outlook, some investors may question its prospects. This is because Lockheed Martin’s most recent dividend increase was rather underwhelming.
Earlier this month, the company boosted its dividend by 5% to a quarterly rate of $3.15. This marks a deceleration from last year’s increase of 7.1% and an even steeper one from Lockheed Martin’s 10-year dividend per share (DPS) compound annual growth rate (CAGR) of 10.6%. Therefore, it’s not unreasonable that some investors perceived the recent dividend increase as a rather concerning one.
However, I believe that there are key reasons explaining this deceleration that completely justify management’s decision to pursue a more prudent strategy. First, Lockheed Martin recently delayed deliveries of the first F-35 fighter jets, which have been upgraded with new avionics, to the second quarter of 2024.
The most recent adjustment to the schedule indicates that Lockheed now anticipates delivery of just 97 F-35s for this year. This marks a further reduction from the previously estimated range of 100 to 200 and a significant deviation from the company’s initial plan to deliver between 147 and 153 aircraft this year.
Delayed deliveries could alter the company’s cash-flow projections. Thus, it makes sense that management’s dividend increase was more prudent than in prior years. However, that’s only part of the reason.
Another factor is the company’s indebtedness. With its total debt standing at $17.6 billion and interest rates on the rise, it makes much more sense for the company to prioritize deleveraging before accelerating returns to shareholders. However, that’s not bad for shareholders. If anything, getting rid of expensive debt and thus lowering its interest expenses over time should be more accretive to creating shareholder value than boosting the dividend by a more aggressive rate.
Based on this, I do see Lockheed Martin as a strong dividend growth pick. Again, the company’s dividend growth could re-accelerate once the current jet delivery slowdown improves and it pays down some of its expensive debt.
In the meantime, the stock’s 2.9% dividend yield may not appear substantial during the current interest rate environment. With the market’s “risk-free” rate close to 5% these days, it’s harder for investors to get excited about a 2.9% yield, especially given the recent downshift in dividend growth.
However, taking a long-term view, Lockheed Martin’s current dividend and overall growth prospects should be proven superior. The quality of the divided and management’s commitment to growing shareholder value should also be taken into account in this equitation. Don’t forget that Lockheed Martin now boasts 23 years of consecutive annual dividend increases, putting it on the path to becoming a Dividend Aristocrat.
Conclusion
Overall, Lockheed Martin’s recent stock-price surge following the escalating geopolitical tensions underscores its pivotal role in supplying crucial defense systems to nations grappling with conflicts. The company’s current order backlog of $158 billion, a record high, speaks to its sustained growth potential as ongoing conflicts worldwide continue to drive demand for its advanced aerospace and defense technologies.
Despite concerns about a deceleration in dividend growth, Lockheed Martin’s strategic decision to prioritize deleveraging and navigate challenges, such as by delaying F-35 deliveries, demonstrates a prudent approach to long-term value creation. While the 2.9% dividend yield may seem modest in the current interest-rate environment, Lockheed Martin’s proven track record of 23 consecutive annual dividend increases and commitment to shareholder value bode well for the future.
In tandem, with shares trading at a price-to-earnings (P/E) ratio of 16.1x, Lockheed Martin appears reasonably valued despite the recent stock-price surge. This P/E ratio is in line with its historical average and spotlights an appealing investment case, given the company’s resilient outlook in the current industry climate. Consequently, I believe that Lockheed Martin is definitely worth considering, even by those who sense they might have missed the recent rally.
